ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Repacking the Punch in Monetary Policy

The Case for Asset-Based Reserve Requirements

In the wake of financial deregulation and innovation, monetary policy has seen considerable erosion of its potency. Simultaneously, monetary policy has been loaded with several additional onerous responsibilities. In such a situation, the single instrument of the repo rate (supplemented with the cash reserve ratio) exhibits considerable strain in striking a balance between the conflicting objectives of growth, inflation control and financial stability. The interest rate also turns out to be a blunt instrument, leading to blunderbuss and debt footprint effects. To overcome the imbalance between targets and instruments, a maverick suggestion has emerged, viz, shifting the reserves from the liability to the asset side of financial institutions' balance sheets. Asset-based reserve requirements share some similarities with capital requirements and dynamic loan loss provisioning, but differ from these in important details. This paper examines the implications of ABRRs for monetary policy, together with their limitations and difficulties of implementation in an emerging market economy like India.

The views expressed in this article are personal, and do not necessarily refl ect those of the council or other institutions/organisations with which the author is affi liated.

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